Trade and Investment Policy Workshop

22 July 2015

Chairperson: Ms J Fubbs (ANC)

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Meeting Summary

The Department of Trade and Industry told the Committee that the global economy was undergoing a relative shift in economic power --from north to south, and from west to east. The BRICS countries were fast emerging as the new sources of global economic growth, trade and investment flows, reshaping the global economy. Africa was now the second fastest growing region in the world after Asia, with enormous reserves of raw materials and 60% of unused arable agricultural land. From 2007 to 2013, South Africa had been the biggest investor on the continent. Africa’s full economic growth potential would remain unfulfilled unless the challenges of poor infrastructure, small and fragmented markets and inadequate diversification were addressed. South Africa was amongst the most open jurisdictions for Foreign Direct Investment (FDI) in the world and provided strong protection to investors, in line with high international standards.

There had to be a complementary relationship between trade and investment decision making, as trade might be an outcome of investment, and investments an outcome of trade opportunities. Currently, the investment system suffered from a highly fragmented dispute settlement system without any precedent system to moderate legal and interpretive divergence. There was a lack of common standards of protection, inconsistent interpretation by arbitration panels even on similar matters and a lack of transparency and a lack of investor rights and host state obligations. The South African government had adopted a new investment policy framework in July 2010 and a Cabinet decision had been taken to implement it with five core measures, namely:

An intra-governmental process would be initiated to explore the establishment of a national investment act;

South Africa would enter into bilateral investment treaties (BITs) in future only on the basis of compelling economic and political reasons;

Development of a new BIT template, in which standard provisions would be formulated to reduce the scope of unpredictable, inconsistent and arbitrary interpretations

Most BITs South Africa had entered to, which had been in force for ten years or more, were open for review and termination;

An interministerial committee (IMC) to be established on investment to oversee the implementation of these measures

A draft Investment Act had been completed by the DTI, and its introduction to Parliament was imminent. The Promotion and Protection of Investment Bill had been endorsed by the Cabinet on 24 June 2015, certified by the state law advisors on 16 July, and upon final proof reading would be introduced in Parliament.

Members asked how SA was consolidating trade in Africa, the compelling political and economic reasons under which new BITs would be negotiated, what would be used to protect SA investments in other countries -- since BITs had been cancelled – and why the BITs had not been extended for three years while the Investment Bill was being drafted. They also wanted to know about progress on the Continental Free Trade Area, how other countries would protect themselves from South African products -- as South Africa would benefit more than any other African country -- and how poor countries in Africa that relied mainly on tariffs to fund their budgets would benefit from free trade areas.

The Committee was told the Integrated National Export Strategy (INES) was being reviewed. This was aimed at increasing South Africa’s capacity to export diversified and value-added products to various global markets, strengthening the country’s export performance by enhancing the trade and business environment, and improving the competitiveness of companies and sectors. INES sought to grow exports by 6% per annum to 2030, culminating in South Africa capturing 1% of world exports by 2030. Members said plan looked impressive and comprehensive, but needed a lot of resources to be implemented for the country to be able to compete with Brazil and India. They warned that the policy must not mire exports in red tape.

Meeting report

World trade background

Ambassador Faizel Ismail, Advisor to the Department of Trade and Industry (DTI), said the main architects of the General Agreement on Tariffs and Trade (GATT) were the United Kingdom and the United States, but the Havana Charter had been rejected by the US in 1950. GATT was by default led by the interests of the United States and the European Union. Developing countries had not had recognition until 1954/55. Currently, there was an imbalance, as the Doha Development Mandate had recognised the needs of developing countries in all areas, but it had collapsed after 2009 when the Obama administration had said it was not in the interests of the US. The global value chain (GVC) concept had gained currency, providing new analyses of globalization, placing greater emphasis on services and less on agriculture, and reducing the importance of tariffs. In future, a nuanced analysis of globalization was required, with GVC being less pervasive. The UN Conference on Trade and Development (UNCTAD) had indicated that developing countries could “trade more and earn less.”

South Africa’s Trade and Investment Policy

Ms Xolelwa Mlumbi-Peter, Acting Deputy Director General: International Trade and Economic Development (ITED), DTI, said the global economy was undergoing a relative shift in economic power --from north to south, and from west to east. The BRICS countries were fast emerging as the new sources of global economic growth, trade and investment flows, reshaping the global economy. Africa was now the second fastest growing region in the world after Asia, with enormous reserves of raw materials and 60% of unused arable agricultural land. From 2007 to 2013, South Africa had been the biggest investor on the continent. Africa’s full economic growth potential would remain unfulfilled unless the challenges of poor infrastructure, small and fragmented markets and inadequate diversification were addressed.

South Africa was a relatively open economy, only moderately protected by tariffs. 56% of duties were set at zero percent. The service sectors were open, with World Trade Organisation (WTO) service commitments exceeding some Organisation for Economic Cooperation and Development (OECD) countries. South Africa was amongst the most open jurisdictions for Foreign Direct Investment (FDI) in the world and provided strong protection to investors, in line with high international standards. The fastest growing exports in world trade were non-resource based manufactures. There was an emergence of global supply chains for manufacturing and services as a result of production unbundling and growing trade in intermediate products. While there had been extensive tariff liberalisation since 1994 and an increase in exports, South Africa’s exports were dominated by commodities, a decrease in labour intensive production and a bias towards capital and high skills intensive growth. Any further tariff liberalisation without purposeful intervention in the economy was likely to perpetuate this trend.

There had to be a complementary relationship between trade and investment decision making, as trade might be an outcome of investment, and investments an outcome of trade opportunities. Bilateral investment treaties (BITs) and international investment agreements (IIAs) had become the dominant international vehicle through which investments were regulated, with implications for countries. It was necessary to assess the implications of entering into BITs and IIAs, the substantive shortcomings of their provisions, and the challenges posed by Investor State Dispute Settlement (ISDS) mechanism, possible areas of reform, and to decide on the most appropriate way forward. Currently, the investment system suffered from a highly fragmented dispute settlement system without any precedent system to moderate legal and interpretive divergence. There was a lack of common standards of protection, inconsistent interpretation by arbitration panels even on similar matters and a lack of transparency and a lack of investor rights and host state obligations.

The South African government had adopted a new policy investment policy framework in July 2010 and a Cabinet decision had been taken to implement it with five core measures, namely:

An intra-governmental process would be initiated to explore the establishment of a national investment act;

South Africa would enter into BITs in future only on the basis of compelling economic and political reasons;

Development of a new BIT template, in which standard provisions would be formulated to reduce the scope of unpredictable, inconsistent and arbitrary interpretations

Most BITs South Africa had entered to, which had been in force for ten years or more, were open for review and termination;

An interministerial committee (IMC) to be established on investment to oversee the implementation of these measures

A draft Investment Act had been completed by the DTI, and its introduction to Parliament was imminent. The Promotion and Protection of Investment Bill had been endorsed by the Cabinet on 24 June 2015, certified by the state law advisors on 16 July, and upon final proof reading would be introduced in Parliament.

Discussion

Mr A Williams (ANC) said the WTO had been set up to protect western imperialists in developing countries. As developing countries became bigger, when was the GATT process going to stop? What was a developed country -- was SA a developed country or not? Was Greece still a developed country, taking into account current circumstances? He asked if Sasol was a foreign or domestic company and whether, if a company had offshore headquarters, it became a foreign company. What did liberal repatriation of profits mean?

Mr N Koornhof (ANC) asked how SA was consolidating trade in Africa.

Mr G Hill-Lewis (DA) said the Minister admitted in this Committee that the communication on the cancellation of BITs had been mishandled, and this had created a lot of uncertainty around the country’s investment climate. Why had the BITs not been extended for three years while the bill was being drafted? He asked if there had been any progress on the Tripartite Free Trade Alliance (TFTA) and the Continental Free Trade Alliance (CFTA) as it looked like it would be several years before there was an operational TFTA.

Professor Riekie Wandrag, University of the Western Cape Law Faculty, asked about the compelling political and economic reasons under which new BITs would be negotiated. With the cancellation of the BITs, what would be used to protect SA investments in other countries, since BITs were a two-way benefit?

The Chairperson asked what made Japan think that its investments were safe, as there had never been a BIT between it and SA, despite the fact that it was a large country. She asked how the GATT process had begun.

Ambassador Ismail replied that the GATT had emerged from victors of the Second World War. The UK and US had known that the world was in crisis because of the lack of any trade rules. Competition between countries had been the main cause of the war and all the countries had agreed on the need to establish rules. The United Nations had even started discussions to have a rule-based trading system. Whether it had been able to achieve its objectives was another question. The International Trade Organisation (ITO), which should have been a rule-based organization, had been thrown out by the US because it thought it was an intrusion into its sovereignty. It had also felt there were many developmental objectives in the Havana Charter. The concept of development at that time was about the reconstruction of Europe, as most of these countries were in a poor state after the Second World War. The GATT had succeeded in one respect, in that there had never been a world war since 1947 and the dispute settlement system had worked, even though there had been challenges.

There had been a lot of criticism of GATT, in that it had been formulated by Europe and the US, and had never considered the plight of developing countries. Agriculture, for example, had never been negotiated until the eighth round of GATT, and this had been the first issue developing countries had put forward. Textiles and clothing had also been excluded and had become more and more protectionist. There had also been inequality in that the rules for investment were imbalanced, as they had focused on industrial production and not agriculture. Agriculture could be subsidised as much as one wanted, and this still remained the case. The Doha round had been very important for developing countries and they had come closer to agreement, but it had collapsed because the US had seen that it was not in their favour, but in the favour of emerging countries, especially China. This was what development meant. The US was trying to ensure that the rules remained in its favour.

For the African Growth and Opportunity Act (AGOA) process, no one knew how the procedure would flow, but the decision by Congress to extend AGOA put a provision for outward review for South Africa. For everyone else, there was an annual review between trade and investment, and the key issue was whether it was in their interests and whether the countries had made any real effort to address the concerns of raised by the US. In the case of South Africa, it had been in negotiations over issues of whether the US felt its interests had been prejudiced -- for example, poultry, and a number of other issues. The second issue related to pork, and the third to beef, resulting in certain health standard measures for these foods having to be undertaken by the Department of Agriculture, Forestry and Fisheries. Discussions were taking place about standards and poultry, but these had not been concluded. These discussions were very complex as during the negotiations the United States had been affected by bird flu, more than 12 issues were now being discussed. The issue was how SA could a provide market for US poultry from states not affected by bird flu, which was a very complex technical question. However, this would be concluded soon and the US had just opened the out-of-cycle review process. He was in constant contact with the US local representative and the next engagement was on 27 July. There was no cause for alarm.

Ms Mlumbi-Peter said the liberal repatriation of profits was subject to applicable laws. It was not just about a company repatriating profits, as there were balance of payments issues. Given that there was decrease in foreign aid, it was the time to increase trade with bilateral partners. With the decrease in tariffs globally because of commitments to the WTO, the trend globally was an increase in non-tariff barriers. Access to markets was critical for South Africa’s products and employment generation.

There had been an increase in trade in Africa, which accounted for 23% of global trade. About 40% of this was manufactured products. It was not only an increase in trade, but also an increase in the content of trade. There had been challenges on the continent, which was why it was looking at a developmental integration agenda. Through the various forums, projects had been identified to increase intra-African trade, the development of strategies for industrial development and other soft issues related to customs cooperation, and other impediments that impeded intra-African trade.

The BITs were an area that needed to be improved going forward. Even after termination of BITs, they had survival clauses for benefits to continue while in the process of completing the Protection and Promotion of Investment Bill. The launch of the TFTA had been a significant milestone in the regional integration of Africa agenda. When it came to the implementation of a free trade agreement, this was done on a step by step basis. The launch signified the conclusion of the legal text of the instrument that would underpin the TFTA. The launch had a time frame of 12 months to conclude the outstanding issues. The TFTA involved member states who currently did not have trading arrangements. Companies made investment arrangements based on market access. The CFTA had seen a launch of the negotiations, with an indicative time frame to conclude in 2017. The basis for the CFTA would be the TFTA, as 26 members were already members of the TFTA.

Compelling political and economic reasons would be based on the needs of South Africa and the other nations. These would be considered on a case by case basis, taking into account the rationale for having the BIT. The Inter-Ministerial Committee (IMC) would look at the reasons put forward. UNCTAD had put forward policy proposals for members to consider, and the emphasis should be on trade facilitation and investment promotion to ensure there were mutual benefits between members entering into investment agreements. There were more than 600 companies in SA, and there was no BIT between two states. International evidence showed that there was no direct correlation between concluding a BIT and investments. Whenever it engaged an investor, a BIT was not the major issue. The Department was working with the Southern African Development Community (SADC) and the African Union (AU) to establish a conducive environment for investment.

Mr Hill-Lewis asked about the role of the IMC in the investment process. He asked how poor countries in Africa, which relied mainly on tariffs to fund their budgets, were to benefit from the free trade areas. One of the reservations of the United States in the out-of-cycle review was the private sector industry regulation bill, and he asked what was happening with that bill.

Mr D Macpherson (DA) said that BITs would be negotiated on a needs basis, which went to the heart of trade policy and negotiation. The BITs were better, because they dealt on a country-to-country basis. It was the first time he had heard that there would be an IMC to discuss a BIT. How did individual BITs relate to the bill? He asked what evidence there was, that there was no correlation between the conclusion of a BIT and investment.

Ambassador Ismail replied no one knew what issues would be discussed in the out-of-cycle review on the concerns of US exporters to South Africa. On top of the US issues was poultry, but the three priority issues were poultry, pork and beef. The reason why these issues had not been concluded was that they were complex, and the ongoing bird flu in the US. He had informed the US that private security was not in the DTI’s jurisdiction, as it was under the security cluster. Minister Davis had been in discussion with the police on this issue.

Ms Mlumni-Peters said the TFTA-agreed modalities of negotiating were that there would be a phased 60% elimination of duties. It was mindful of the role of tariff revenues in funding budgets. The trade protocols allowed a member to ask for derogation if it was causing the closing of industries in its country. There were avenues which countries could explore and ask for derogation. A member had been tasked to look into the implication of the decisions countries should undertake to avoid reversing when companies had access to markets. Egypt was looking at 100% elimination, and South Africa was looking at sensitivities where it would not open to trade, as the investment policy was informed by trade. The development of the bill required intra-governmental consultation to ensure that there was agreement between what the Treasury and the economic cluster needed. The IMC had been tasked with making a model BIT template. There had been no rethink to have a broader investment framework. It had been seen that BITs provided protection to foreign investors, ignoring domestic companies. The level of protection provided must be in line with the constitution. After concluding the Investment Act, South Africa would engage on BITs only if there was an economic rationale for doing so.

Mr Hill-Lewis asked if the TFTA had provisions for Non-Tariff Barriers (NTBs), because there was a proliferation of NTBs in Africa. Shoprite, to export to Angola, needed 1 000 pieces of paper. He was asking how other countries would protect themselves from South African products, as South Africa would benefit more than any other African country. There would be some level of suspicion over South Africa’s enthusiasm for the TFTA.

Ms Mlumni-Peters said one of the critical challenges experienced by South Africa and any other country was in relation to perishable products. A mechanism had been developed for this, and there was an electronic reporting system to report an NTB that would be channeled to the contact centre of the member state to facilitate a resolution. For those countries that wanted to phase out 100%, they could phase out and countries could identify sensitivity areas that remained protected.

Draft Integrated Export Strategy

Ms Zanele Sanni, Chief Director: Export Promotion and Marketing, DTI, said the review of the Integrated National Export Strategy (INES) was aimed at increasing South Africa’s capacity to export diversified and value-added products to various global markets and strengthening the country’s export performance by enhancing the trade and business environment, and improving the competitiveness of companies and sectors. INES sought to grow exports by 6% per annum to 2030, with exports of manufactured products growing by 7% per annum in value and constituting 40% of total manufacturing output. Export of services would constitute 40% of total services supplied by 2030. South Africa aimed to capture 1% of world exports, by value, by 2030. (See document for more details).

Discussion

Mr Williams asked if the DTI had an exporter’s handbook, like the investor’s handbook. It seemed it was easier to manufacture and sell goods online than going through the export process of the DTI.

Mr Koornhoof said the wine industry was the only such industry in Africa, but wine in other African countries came from Chile and Italy. He did not know whether the DTI was doing enough to export wine into other African countries.

Mr Hill-Lewis said that while the plan looked impressive and comprehensive, a lot of resources were required for it to be implemented and the country could compete with Brazil and India. However, the policy must not become red tape. He asked if the policy required every single exporter to register with the DTI. The DTI team must have deal makers who were able to secure major export contracts abroad.

The Chairperson said very few entrepreneurs knew about the export incentives offered by the DTI. She asked how skills development was being used for catalytic development, leading to exports.

Ms Sanni replied that an exporter’s handbook had been published in the past, but it needed to be updated, and this cut across all the points raised by Members, including awareness and export financing. It had received approval from the Department of Public Service and Administration (DPSA) to create a services directory, as products were being exported without being captured in the telecoms and online sales through E-bay and Kalahari. The Department was providing a lot of support to the wine industry, including an expo on wines in China. It took a sizeable number of wine producers to engage in such markets. She was very proud that 50 buyers from different countries were to be brought in September to come and visit different wine estates. She was seeing the result of the support given to the wine sector. Wines of South Africa (WOSA) on its own, without the support of the DTI, was doing its own wine shows and also tapped into state funding to go into the West African countries. The Francophone countries used to be dominated by French wines, but the SA wine industry was making significant inroads. Some of the Chilean wines which were priced very low because they were not refined.

The DTI thinking was to coordinate export formations and industry where the institutional framework was right. The aim of the Department was not to add administrative burdens to exporters, but it needed to keep in track of its exporters. The DTI did not call itself deal makers, but business development executives as they went into the markets and created an appetite for South African products. A lot of work went into creating understanding of the country and engaging its representatives abroad and embassies that were in South Africa. If the DTI facilitated deals or joint ventures, it reported on them. The role of the Department was to unlock doors which an entrepreneur was unable to do on his or her own. Exports, of course, did happen without government facilitation. It enabled new exporters to enter the market. The new exporter would not have the capacity to participate in some of the national events, and the Department even provided money to do market research and to provide an audience that may not be available immediately.

There was a specific issue that was debilitating to the South African agri-processing sector. This was the protocols that the Department of Agriculture needed to go through -- and this was across a number of countries. Each of the veterinary institutions in each country needed to ensure that products that came into their country were safe for consumption.